In our first article “Introduction to MiFID II” we highlighted how the new regulations were bringing enhancements to the existing MiFID I regime, which had come under scrutiny following the financial crisis of 2008. MiFID II brings visible changes which have a direct impact on the customers and clients of financial service providers, such as Transaction Reporting and Investor Information. The changes to Corporate Governance and Controls, however, focus on the financial service provider and specifically target four key areas:
Corporate governance
MiFID I required that management bodies of firms be composed of members who were:
"…of sufficiently good repute and sufficiently experienced as to ensure the sound management of [the firm]."
MiFID II introduces a more detailed and defined approach in so much that firms' management bodies must define, oversee, and be accountable for the implementation of governance arrangements that ensure effective and prudent management of the firm, including the segregation of duties in the firm and the prevention of conflicts of interest, and in a manner that promotes the integrity of the market and the interests of clients.
Management bodies must also "define, approve and oversee":
- The organisation of the firm for the provision of investment services and activities and ancillary services, including the skills, knowledge and expertise required by personnel, the resources, the procedures and the arrangements for the provision of services and activities, taking into account the nature, scale and complexity of its business and all the requirements the firm has to comply with;
- A policy as to services, activities, products and operations offered or provided, in accordance with the risk tolerance of the firm and the characteristics and needs of the clients of the firm to whom they will be offered or provided, including carrying out appropriate stress testing, where appropriate; and
- A remuneration policy of persons involved in the provision of services to clients aiming to encourage responsible business conduct and fair treatment of clients, as well as avoiding conflicts of interest in the relationships with clients.
Conflicts of interest
Under MiFID I firms were required to:
- "take all reasonable steps" to identify conflicts of interest between (i) the firm and its clients; and (ii) one client and another client;
- Maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of their clients;
- Where they were not reasonably confident that their arrangements to manage conflicts of interest were sufficient to ensure that risks of damage to the interests of a client will be prevented, to clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business for the client; and
- Establish, implement and maintain an effective written conflicts of interest policy appropriate to the firm's size and organisation and the nature, scale and complexity of their business.
MiFID II retains this broad structure but makes some specific changes:
- An explicit statement that conflicts are to be actively prevented by firms, rather than simply being "identified" and "managed". The standard for the steps to be taken to this end is also changed from the vagueness of "reasonable steps" to the more defined term "appropriate steps";
- There’s an explicit statement that conflicts may be caused by the receipt of inducements from third parties and the firm's own remuneration structures, which ties in with the more stringent requirements in MiFID II around these areas;
- Disclosure must include a specific description of the conflict, must be tailored to the position as it affects the client in question, and must include an explanation of why the firm's conflict management procedures have proved insufficient in the particular instance; and
- Conflicts of interest policies are reviewed at least annually.
Complaints handling
MiFID I's approach to complaints handling was fairly high-level. It required firms to have effective and transparent procedures in place for the reasonable and prompt handling of complaints made by retail clients.
MiFID II complaints handling provisions again retain much of the core elements from MiFID I, but expand the regime to include retail, professional clients and eligible counterparties.
Remuneration linked to sales
MiFID II stipulates the basic premise that sales staff are not incentivised in ways which conflict with the firm's duty to act in the best interests of its clients, especially in terms of making inappropriate sales.
This loops back to remuneration as being capable of giving rise to conflicts of interest, and to the obligations of management bodies to define, approve and oversee a remuneration policy for persons involved in the provision of services to clients aiming to encourage responsible business conduct and fair treatment of clients, as well as avoiding conflicts of interest in the relationships with clients.
Summary
In practical terms, these changes have meant that Equiniti’s project and product teams have updated policy documents and customer terms and conditions, implemented changes to product governance and controls and made the structural and cultural changes that were needed.
We started our series of MiFID II articles just over a year ago, stating that the scope of MiFID II made this a key compliance priority for the industry and our own project and development teams throughout 2017. Although there is still work to do and some matters are still awaiting confirmation from the European Securities and Markets Authority and the FCA, the changes we’ve made ensure that you, your shareholders and employees receiving nominee, custody and dealing services from our regulated business, Equiniti Financial Services Limited, are being provided with services compliant with this strengthened governance regime.
We hope you’ve found this series of articles useful. If you have any further questions about the implications of MiFID II please contact your Relationship Manager.
